reinvent our business model
and that of our companies
The French private equity segment, a veritable growth engine for SMEs and intermediate-sized businesses, must be modernized to meet a threefold challenge: increasingly selective investors, accelerated development of company business models and the reaffirmed need for sustainable growth with an equitable sharing of the value created.
Increasingly selective investors, making greater and more concentrated investments
Private Equity has become a very attractive segment due to the liquidity of debt and equity markets and low interest rates. In the last three years, worldwide capital-raising surpassed $280 billion per year, an unprecedented amount in the past 30 years. The competition between the 2,200 existing investment funds(1) is nevertheless fierce. Faced with such competitive pressure, the challenge is to build an attractive and profitable company portfolio, quickly reach critical mass and increase the average amount of investments.
Greater investor involvement
There was a time when investors entrusted a management company with funds and simply waited for a financial return in relation to an index or its counterparts. This is no longer the case. Today, investors analyze fund performance for each transaction, with more in-depth financial and non-financial monitoring. Just like the “short channels” that are developing in other economic sectors, new technologies enable investors to promote co-investment over intermediate investment. Therefore, a management team is no longer simply assessed in terms of financial performance but also in terms of its managerial skills to extensively transform its portfolio companies.
Responsible investing (ESG) has become the norm
According to a PwC study carried out in 2015, 71% of investors declared that they had opted not to invest in a fund or had terminated their relationship with a management team due to environmental, social or governance reasons. The definition and roll-out of a responsible investment policy, with extensive CSR due diligence reviews, are now sought by more than 80% of investors.
The acceleration of economic and technological cycles requires businesses to have greater flexibility in their markets. The widespread use of digital technologies (80% of French people(2) are internet connected) and collaborative practices require businesses to work in an integrated manner with shorter channels. They can no longer content themselves with just “product/ service innovation”, but must constantly adapt their production organizations, processes and facilities. In the medium term, the business will be enhanced, i.e. digital, mobile, integrated and globalized. To stay in the game, SME executives must anticipate technological, human & social changes. However, business model transformation remains complex for SMEs that struggle each day in an extremely competitive global market. It is for this reason that the private equity segment has to develop its internal expertise to enable SME management teams to make the most of the current economic revolution.
Entrepreneurs also need a shareholding base and financial resources that are tailored to these new disruptive models, which means combining short product development cycles and longer timeframes to thoroughly transform their organizations. It is therefore vital to select medium and long-term shareholders capable of accompanying the business in a common project.
GROWTH OVER THE LONG TERM
Today, being an integrated investor means devoting time to prepare the business for its future challenges, while involving and respecting its stakeholders (employees, suppliers, clients and authorities). By extending the management company holding period, shareholders are able to support management in the company’s radical transformation, while optimizing its social and societal impact. As the private equity segment has incorporated this requirement, the average management company holding period in the market increased from 4 years in 2008 to 6 years in 2014(1).
(1) 2015 Preqin study.